The Pinkerton Publishing Company is considering two mutually exclusive expansion plans. Plan A calls for the expenditure of $50 million on a large-scale, integrated plant that will provide an expected cash flow stream of $8 million per year for 20 years. Plan B calls for the expenditure of $15 million to build a somewhat less efficient, more Labor-intensive plant that has an expected cash flow stream of $3.4 million per year for 20 years. The firms cost of capital is 10%.

a. Calculate each projects NPV and IRR. (4 marks)

b. Set up a Project by showing the cash flows that will exist if the firm goes with the large plant rather than the smaller plant. What are the NPV and the IRR for this Project ? (3 marks)

c. Give a logical explanation, based on reinvestment rates and opportunity costs, as to why the NPV method is better than the IRR method when the firms cost of capital is constant at some value such as 10%. (3 marks)